A Change in Character

The number of changes China is attempting to make all at once in its economy is astounding.

It is going from central planning to a market economy, from state-owned companies funded without question by state-owned banks to tough-minded commercial banks and listings on the New York Stock Exchange.

And most profoundly, it is going from government-supplied housing for the masses to homeownership and mortgages, with all the potential for economic development and democracy that such property rights entail.

In one giant leap, China, seen until now as a trade nightmare threatening to flood the world with low-priced exports, is trying to realize its true potential as the largest domestic economy the world has ever seen.

And it is trying all this in an economy in which rising unemployment is high at roughly 12 million people, almost 7% of the urban labor force, according to economist Hu Angang, a leading research fellow at Beijing’s prestigious Qinghua University. “There are many contradictions and conflicts” in China’s ambitious program of change, Hu observes.

But China had little choice, because it’s time for it to move on economically. China’s people have seen living standards rise in the last 15 to 20 years, or since the late Deng Xiaoping began the long restructuring of the nation’s economy.

Wages have risen. Typical salaries in state-owned industry are less than $3,000 a year, but the pay in joint-venture companies often reaches more than $7,000 a year. Moreover, in the cities, everybody who can find a job works. Half the country’s labor force remains on the farm, so in the cities there are jobs for husbands, wives and grown children. Households can bring in decent monthly incomes. And they are saving 40% of those incomes.

Expenses can be low. The people have almost no cost for housing because at present it’s supplied by the enterprise or government ministry at which they work. They buy what they need and spend small amounts on luxuries such as makeup or a movie--”Titanic” is a huge hit here.

But overall, there’s not much to buy. China’s is a developing economy, with four telephones per 100 people, contrasted with more than 80 per 100 in the U.S. and other developed countries. Most people still use bicycles, not automobiles.

So China must increase its productivity if living standards are to progress. It needs to build roads and airports and modern telecommunications if its economy is to develop and its workers are to move from overstaffed manufacturing enterprises into service jobs in accounting and finance, computing and communications.

The country is counting on foreign investment to help it build productivity-enhancing infrastructure, such as a nationwide fiber-optic network announced in Beijing last week.

China hopes to float $750 billion in bonds on international markets in the next few years. So it has to get serious about offering investors solid returns and safety of capital, as opposed to promises of big consumer markets in the sweet by-and-by.

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And that’s why China is trying to make so many changes, with the most important of all the “monetization of housing,” as the program is officially called.

Employees who now live in dwellings owned by their workplaces will be asked July 1 to buy their housing. They can choose not to buy, but their rents will go up 50% a year till 2002 if they don’t.

It’s a complex forced-march attempt to “distribute housing not on the basis of welfare, but on the basis of money,” says Shen Jianzhong, a deputy director of real estate in the Ministry of Construction.

To hear housing, once hailed as a worker’s right in the Marxist economy, described as “welfare” may seem cruel, but use of the word by Chinese civil servants today speaks volumes about this changing society.

How will the workers buy their houses? With loans and grants. For ordinary low-wage workers, the enterprise or department for which they work will put 30% of their pay into an accommodation fund. This will become the worker’s down payment, which he or she theoretically has earned in “sweat” equity.

Then the government or a state bank will grant a mortgage on the balance of the cost of the dwelling.

For the low-paid, a partly subsidized mortgage from the China Construction Bank may cost 6.7% for a 15-year loan of up to $12,000. The government’s aim is that mortgage payments will equal 15% of a worker’s income by 2000, an increase in housing costs from the 4% of income that now constitutes rent.

For middle-income people, such as those making $7,000 a year and above in joint-venture companies, customary mortgages will be available at 9.9% to 10.5%, for 15 years.

Civil servants and bankers stress that formal rules for the July 1 monetization of housing won’t be released until May or June. But it may be that no rules will be released and that housing authorities and banks in various cities will develop their own systems.

That’s how markets work, and the government of Premier Zhu Rongji fully intends that lively housing markets will spring up. In all cases, from subsidized worker to middle-income elite, the purchaser of a dwelling will have the right to sell it. From having a nominal value on the books of a state enterprise, a house will come to have a real value.

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In the process of creating a residential real estate market, the government will draw the people’s savings, estimated by bankers to total 5.4 trillion renminbi, or $700 billion, into productive investments. That $700 billion in savings is an impressive sum in an economy with $1.7 trillion of annual output of goods and services, or gross national product.

Zhu Rongji will also have prevented unproductive investments. In 1994, when he first came to prominence as a master of China’s economy, the country was hit with a speculative bubble in commercial real estate. Office buildings spiraled up in price in Shanghai and other cities. Inflation hit 20% and threatened to soar out of control.

Zhu stabilized the situation, hiking interest rates and devaluing the renminbi to squeeze speculators and developers who were using foreign money to finance their projects.

He and the world have since witnessed another commercial real estate bubble inflate and collapse in Southeast Asia. Developing countries with few outlets for the people’s savings are subject to such calamities.

So Zhu has decided to take a different route. By drawing the people’s savings into homes, he hopes to create the enormous economic engine of housing and furnishings and mortgage financing and construction that has powered the U.S. economy, which in many ways China looks to for good example today.

The ripple effects move beyond housing. The program is central to reform of the state banks, which will be encouraged to make good mortgage loans as opposed to loss-making financings of state companies.

Housing will create service employment in real estate, property management and finance.

Most significantly, the housing program will allow people to choose where to live, which surely will be followed by homeowners’ raising their voices about taxes and inflation and community conditions.

It also promises homeowner pride and do-it-yourselfers; Home Depot is soon to open a big store in Shanghai, which has experimented with privatized housing in recent years.

To be sure, the Chinese economy still faces many hard questions. Giving away housing assets to their workers won’t help state-owned enterprises pay back $200 billion in overdue loans to state-owned banks.

The government will have to absorb those debts, possibly hurting its credit rating just when it wants to borrow on world markets.

Making all the changes when the Asia crisis has slowed foreign investment and China’s exports has to be a big risk too. “The tasks facing China’s government today are harder than they have ever been,” says John Langlois, head of J.P. Morgan Co.’s Beijing office, who nonetheless believes that the government will come through.

Very likely it will. There’s a confidence in China today. Its young bankers, officials and entrepreneurs feel not only that their country is weathering the Asia crisis, but that it is showing leadership for a new era by moving to deregulate its economy.

The implications are immense. If China continues on its new path and becomes a mighty importer, as well as exporter, of goods and services and ideas, the effect will be one of the most positive developments for the world economy in decades.